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Another Hedge Fund Bites The Dust: Trafigura Shuts Down Its Flagship Metals Fund
Two months ago, with everyone focusing on Glencore, we urged readers to "Forget Glencore: This Is The Real "Systemic Risk" Among The Commodity Traders" in which we profiled the "other" major independent commodity trader, Trafigura, specifically looking at the quite daunting $21.9 billion in disclosed debt which suggests a debt/EBITDA of a staggering 10x.
Since then the newsflow out of Trafigura has been troubling (perhaps justifying why its bonds continue to yield somewhere north of 8%) and culminating last week with the announcement that Duncan Letchford, chief executive officer of Trafigura’s hedge fund Galena Asset Management, is leaving the company. As Bloomberg, who first reported the high profile departure last week, wrote, "Letchford, who has served as a member of Trafigura’s management board since August 2012, is leaving to pursue other interests" adding that Letchford took over the role of Galena CEO in March 2014 from Jeremy Weir, who became CEO of Trafigura after co-founder Claude Dauphin was diagnosed with cancer."
Letchford was the third senior executive to leave Trafigura in six months. His exit follows the resignation of Chief Financial Officer Pierre Lorinet, who left in September, and Simon Collins, the former head of metals who departed in May.
And while the storm clouds continue to build above Trafigura, we now know the fate of Galena and why its CEO Letchford departed the company in a hurry last week: according to a follow up from Bloomberg, Trafigura has decided to close the flagship Galena Metals Fund, the latest hedge fund victim of the rout in raw materials markets from oil to copper.
"In view of the difficult conditions prevailing on commodities markets, Galena Asset Management has decided to wind down the Galena Metals Fund," Trafigura said in a statement on Monday. "Investors have been informed and trading positions are being unwound in an orderly manner.”
This is how Trafigura described the various strategies employed by the now-defunct hedge fund:
LIQUID TRADING STRATEGIES
Most assets are managed in Galena’s liquid trading strategies. These take long-short, directional and strategic positions in metals and minerals. There are two main funds.
The Galena Malachite Fund is a single-client fund managed against an agreed benchmark. The Fund has significantly outperformed its benchmark since inception. The Galena Metals Fund is the company’s flagship fund. It has generated outstanding performance over more than a decade, with low volatility and a compound annual return of 9.21 percent to 30 September, 2014.
CREDIT STRATEGIES
The Galena Commodity Trade Finance Fund generates stable and uncorrelated returns with extremely low volatilities. It has been returning close to 5 percent over London Interbank Offered Rate (LIBOR) to investors annually. The Fund participates in the low-risk segment of global pre-export commodity trade finance transactions alongside banks. It is typically held by institutional investors as part of a larger portfolio of assets to diversify their fixed-income risk.
REAL ASSET STRATEGIES
The Private Equity Resources Fund closed in September, 2014 with over USD400 million of total committed and invested assets. The Fund invests in both the equity and debt of small to medium sized metals and mining companies, particularly those that are in a development or expansion phase. The Fund invests globally in coal mining, and base, ferrous and precious metal assets. Its major independent investors sit on a Limited Partners Advisory Committee (LPAC). The LPAC is currently composed of two family offices, a US university endowment and a European listed insurance company.
This is what Trafigura will look like now that Galena is out:
Copper strikes again.
Bloomberg adds that Galena is one of the best-known hedge funds investing in metals, particularly copper, alongside rivals Red Kite Group and Citrine Asset Management LLC. Copper prices fell this month to a six-year low below $4,500 per metric ton. The LMEX Index, which tracks the price of aluminum, copper, nickel, zinc, lead and tin, has lost half its value since setting a record in 2007.
What is again surprising is that the loss suffered by Galena, whose AUM was as high as $2.2 billion as of September 2014, is hardly earth-shattering: "the $300 million Galena Metal Fund dropped 4.5 percent this year, heading for its first annual loss since 2012."
Perhaps it was the failure to continue its winning ways that drove the surge in redemptions: the fund, which was more than twice its current size five years ago, had made money in nine out of 10 years since it was started in 2005.
Trafigura, which has major operations in Geneva and Singapore, said it will retain other funds, including its private equity fund focused on debt and equity of mining companies. The trading house will update the market on its hedge funds when it releases its results later this month.
Galena is not the first casualty in the commodity hedge fund space, where traders are heading for their worst year since the 2008-09 global financial crisis. One prominent name to recently shutter was the $450 million Armajaro Commodities Fund.
Others include Cargill which said in September it would spin off its $7 billion hedge fund unit Black River Asset Management. The separation came two months after Black River shut down four funds investing in equities, emerging markets, commodities and a regional fund focused on Europe, Africa and the Middle East.
Krom River Trading AG, a commodities hedge fund based in Switzerland, told investors earlier this year it would re-launch after its assets under management fell to $64 million in June, down from about $800 million in 2012.
The one common theme among these commodity casualties is that they were all just levered plays on China's commodity demand remaining stable. Since this thesis has failed misrably in the past year, expect many more closures, some of which will ultimately impact the holding companies, even if they, like in the case of Galena and Trafigura, transacted at what at first sight appears to be arms' length.
Finally, as Bloomberg writes, the amount of money under management by hedge funds specializing in commodities stands at $24 billion, 15 percent below the peak three years ago, data from Hedge Fund Research Ltd. show. This AUM has not kept up with the drop in underlying metals suggesting that if the commodity downturn persists, many more closures are only a matter of time.
As for Trafigura, keep a close eye on its various other subsidiaries and investments among which Puma Energy, DT Group, Impala Terminals, and the Trafigura Mining Group: any continuing weakness for Trafigura's overlevered business model certainly lead to more shutterings among these subs before it finally impacts the commodity trader itself.
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There is NO RISK -- Blah, blah, blah. One thing matters -- the FED and the ECB. They will not let equity markets go down. BUY THE DIP. IT ALWAYS WORKS. ALWAYS WILL. EASY MONEY.
As much as it hurt my rational self to write this, history is precedent and I think HMN is correct.
Or at least be hedged.
" Yes we can! "
Rational thinking should never enter into the equation when irrational actors are running the show. There is just too much liquidity, and the Pahvlovian dogs are trained to buy the dip -- always. Don't fight it. Don't hedge. Just get long, and longer every time the market sells off. IT IS EASY MONEY with very little risk. Please don't be rational -- it will cost you profits.
"history is precedent" -- Yes, now remind us, historically speaking, what has the purchasing power of PMs done (regardless of the fiat du jour...)?
What happens when the unproductive members of a society outnumber and require more resources/services than the productive members of that society can provide?
Yes, that which cannot be sustained, won't be...
interesting times...
that's what's great about PM's...too bad the sheeple won't have a clue until it's way too late. PM's are rock solid throughout history. A gallon of gas is like 2.10 or so and 2 silver dimes will still buy you a gallon gas after over 100 years.
http://www.coinflation.com/coins/silver_calc.php
Phyzz PM's are near or at all-time highs in nearly every garbage fiat currency around the world right now except for the U.S. dollar. We all know what that is, but this means (along w/ the paper manipulation of PM prices) we can stack phyzz for very cheap right now.
Those days aren't going to last forever and someday soon the dollar will meet it's maker and end up in ashes just like all fiat currencies do.
Less than 2% of the American population own even 1 ounce of silver.
Talk about a shit storm coming...
Keep stacking, folks. As always, gold and silver are the only real money in the history of this planet, so go out an gitchyew some.
A gallon of gas is like 2.10 or so and 2 silver dimes will still buy you a gallon gas after over 100 years.
Yes ... less than 1/2 what it would buy just 4 years ago. And before you can buy that gallon, you have to go to a pawn shop and exchange those two 90% silver dimes for 24 of the kind the convenience store will take for (well, you are willing to give for) the gas.
Please give me an example of a currency that is not fiat. I know of none in my lifetime, my father's lifetime, or my grandfather's lifetime.
Have no fear BTFDers, there will be many dips to buy...chips provided gratis, as the rest of us munch our popcorn.
So, you think the reality of EVERYTHING being inflated and overpriced by phony non-market low interest rates, QE and 'drunken sailor' government spending, personal indebtedness - the result of over personal overspending - is, well, not real? Maybe we can all continue to blow up the bubble but it seems things can't be artificially supported forever.
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and then the Titanic's stern began to take water and it listed 30 degrees starboard............
raise um biatch raise um
Someone PLEASE shut down Sprott Resource Corp before anyone else gets hurt.
ha...ha!
Physical Silver and Gold still being accululated....
DEATH TO THE MONEYCHANGERS AND THE SOCIOPATHS ON WALL. ST......
I see the problem, they invest in real assets, and everybody knows it's much better to hold a claim on an asset. Who needs that pesky overhead when you can sell that claim to ten other chumps believing they can claim those assets at any given point in time?
They clearly need to up their paper gold leverage from 300:1 to infinity... WTF is up with the M-5 WTI chart?
Did the world suddenly build a million windmills?
Calling yourself a hedge fund and operating as a true hedge fund are different things. When I still played in the casino I did my own hedging that way if I was wrong I only had myself to blame. But then again, I didn't charge myself 2 and 20......
"hedge" fund. lulz.
Shouldve done a little more than punt naked-long on the metals. .
I consider a 'metals fund' my spare gun safe. But I'm just a domestic terrorist so what do I know...
The DT Group will be the next one on the chopping block. Expect an early spring closure and dominos to fall like Bear. Once that unit is dead, lots of carrnage will ensue until all units are dead and sold off what assets have any value
"You asked for miracles, Theo, I give you Bear Sterns 2.0"
Moar Robuster Rekovery looks like.
... or is it "Green Shoots?"
It's not a Fund, it's a Racket
if somebody said, they're going to start a Hedge Racket, you probably wound't get much Biz, know what I'm sayin'